Tether Reserves in Question and Bitfinex to Complete IEO Amid Major Lawsuit

Key takeaways:

• Tether has a long and tumultuous history with questions over their funds being raised for several years
• The New York Attorney Generals Office (NYAG) is now suing the company behind both Tether and Bitfinex with evidence that Bitfinex lost access to $850 million of depositors money
• Bitfinex is issuing an IEO to raise funds to cover the $850 million in funds which it turns out to have been frozen by a number of governments while in the control of payment processing company Crypto Capital

The stablecoin Tether is one which has a long and complicated history in the cryptocurrency world. For a long time, questions have been raised over whether there are actual funds supporting Tether’s peg with the USD.The situation has been heating up recently since the New York Attorney General’s office sued the company behind Tether and closely tied exchange Bitfinex. The company, iFinex, is alleged to have covered up a loss of $850 million.

 

The lost funds are claimed to have been withdrawn from Tether’s reserves to cover losses incurred by the exchange Bitfinex.

 

The History of Tether

 

Tether’s history is as complicated and tumultuous as the claims against it. Tether started under a different name and with a different purpose.

 

“Realcoin” was a stablecoin which would be valued based on a basket of fiat currencies. The project was the brainchild of trio Brock Pierce, Craig Sellars, and Reeve Collins.

The project started out in early 2014 but quickly transitioned into Tether, a USD-pegged stablecoin. The project started its first few years in relative obscurity and small in scale.

 

The project remained at a market cap of less than $10 million up until the end of 2016. The Tether market cap began to increase rapidly in Q1 2017 with huge deposit inflows and the market cap was $100 million by the end of May in 2017.

 

One of the shady facts of the Tether story is that any link between Bitfinex and Tether was denied up until 2017. This was denied up until the Paradise Papers leak in 2017 that provided evidence that the same founding team was behind both companies.

 

One concerning development during this time was a number of hacks taking place on Bitfinex. The following hacks took place over the space of a few years:

• A hot wallet was hacked on May 22nd 2015 resulting in around 1,400 bitcoin being stolen (approximately $400,000 at the time)
• The second biggest hack in the history of cryptocurrency exchanges took place happened around 1 year later with 119,756 bitcoin being successfully stolen (approximately $72 million at the time).

 

Amid all of this, questions started to be seriously raised about whether Tether actually had the funds to back its peg. Although many audits were attempted, a proper audit was never carried out.

 

A failed relationship with auditor Friedman LLP highlighted that all may not be as it was supposed to be at Tether.

 

Banking Troubles and Crypto Capital

 

As deposits began to rapidly grow at the start of 2019, Tether began to face some issues with banking partners. One of the first hints that Tether and Bitfinex may be connected was a lawsuit issued against Wells Fargo that had both Tether and Bitfinex as the plaintiffs.

 

This would prove to only be the start of Bitfinex’s banking troubles. Bitfinex would go through several banking partners forcing them to use more risky options.

 

Bitfinex eventually ended up establishing a relationship with payment processing company Crypto Capital. Crypto Capital is a Panama-based payment processing company that processed payments for a number of loosely regulated exchanges.

This was definitely a risky relationship for a business the scale of Bitfinex and the lawsuit issued by the NYAG was based on Crypto Capital losing access to $850 million of the funds that were Bitfinex deposits. While depositors funds were trusted with Bitfinex, it has since been announced that Bitfinex cannot fully access all of depositors funds and Tether is not fully backed by cash reserves.

 

How many reserves are actually backing Tether?

 

Since the allegations, new information has come to light that was deliberately withheld from tether users. The general counsel for Tether disclosed in an affidavit that tether is only 74% backed by cash reserves.

 

The remaining 26% is claimed to be held by Bitfinex. The general counsel compared the backing with the banking system whereby banks only keep a fraction of depositors funds.

It has been discovered that $850 million of Bitfinex depositor funds have been locked by the Portuguese, Poland, and US governments. But now Bitfinex is jumping on the latest fundraising trend to hit cryptocurrency to provide a solution to this.

 

Bitfinex Token Sale

 

The latest development in this fiasco is planned by Bitfinex to complete an Initial Exchange Offering (IEO). Bitfinex aims to raise $1 billion to cover the frozen funds locked by Poland, Portuguese, and US governments.

The tokens will be issued to private investors until May 10th and will then be issued to public investors if there is any allocation is left over. All while this is happening, the legal situation continues to heat up.